Posted on 02 July 2012.
Margin in futures investing is the required capital necessary to buy or sell a contract that typically ranges from five to fifteen percent of the total value of the contract. This allows investors to leverage large contracts or to purchase many contracts with a much smaller initial investment than would be necessary at full price. Margin amounts will differ from one asset to the next and serves a variety of functions in the futures investing markets.
Initially, the margin amount is set to establish a guarantee between the buyer and seller of a futures contract ensuring the day-to-day fluctuations within the market are covered. At the end of the trading day, both buyer and seller accounts will be balanced according to market change providing an immediate record of each investor’s daily profit or loss.
As profit and losses are realized, an investor will be required to maintain a minimum margin amount established by the futures exchange at which the contract is being traded to ensure balanced accounting at the end of each day. In the event that the contract price change in a single day is greater than an investor’s margin balance, the investor will be required to cover the difference.
The small percentage of capital required for the initial purchase of a futures contract allows investors to leverage substantially more capital than they could through other types of investment vehicles. The primary concern is the daily change, and this is typically less than the established margin minimum amount. Investors who are able to maintain at least the minimum margin for a contract are in a position to reap substantial gains when their predictions are correct. This is one reason futures investing is an attractive investment option.
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